Monday, April 19, 2010

A Panel Discussion on Currency Valuations CWA 2010

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Last week, I had the opportunity to hear a panel discussion titled, "The Dollar, the Euro, The Yuan: Worldwide Currency Devaluation" at the University of Colorado's Conference on World Affairs. The panel was comprised of Patrick Boel, Achim Koddermann, Val Koromzay, and Henry Levine. I especially appreciated the remarks by global economic expert, Val Koromzay, who just retired from the OECD two years ago.

From Koromzay:
Currencies depend upon "relative". If everyone else is doing worse, you'll have the strongest currency. You can't predict currency valuations. Countries want weaker currencies to export more, but there are other consequences, too, such as in manufacturing you need parts from elsewhere, and you need to import commodities. Midsize companies complain about a lower currency valuation, but multinationals, not so much.

The U.S. has been the consumer of last resort and that will be changing.

American's attitude has been, "You don't have to save to get rich, you have to invest to get rich." Both the U.S. consumer and government have to start saving more. This will put pressure on China. But the currency valuation with China is not important. Global rebalancing is going on. There is a possibility of a smooth global adjustment. It is very important to us that currency debt is held in dollars.

The carry trade complicates central bank policy and inflation. Central banks can move the overnite rate, but international investors make longer term rates uncontrollable. This fact resulted in NewZealand having no control over its housing bubble, for example.

It is doubtful that anybody will be kicked out of the EU. Unfortunately, when the times were good, the EU did the minimum necessary to strengthen its budget.

The Scandinavians have good fiscal policy.

As for currency rebalancing, be careful what you wish for. You may increase the risk of instability with capitol controls. What if China has a crisis? Monetary policy and central banks are what determine the valuation market.

Koromzay has never understood gold bugs.

When asked to predict the economy for the next two decades, he answered:
Productivity will be slower over the next 20 years at 1-2%, but real GDP will grow. Real income will be less than that. The economy grows in cycles. He has no idea how the US will deal with its unsustainable budget, but cites the quotation that “Democratic government can be counted on to do the right thing … but only after they have tried everything else!”

Also, I'd like to add some comments by Levine:
American's shouldn't care so much about the RMB. It won't affect jobs much. If China becomes too expensive those jobs won't come back to the US anyway. They'll go to Viet Nam and other nations with cheaper labor. Our trade deficit has been stable over the last decade but the percent towards China has grown. Chinese leaders are very worried about inflation. So it would help them to raise their currency but that would decrease their exports and increase their unemployment and social unrest. They WILL appreciate their currency this year.

in concluding . . .
The most oft repeated phrase by all of the panelists in this discussion was "be careful what you wish for," referring to our desire to have the RMB appreciate.